Managed futures mutual funds: A story of growth

The Innovation Spotlight at the Managed Futures Pinnacle Awards, held on June 17th in Chicago, recognized PIMCO and Milliman for our innovative use of futures within funds to manage risk for those nearing or in retirement.

For more information on Milliman’s groundbreaking approach to managing retirement risk, click here.

Video transcript

Narrator: The managed futures industry has grown dramatically over the past 30 years with a host of trading styles and innovative approaches. And now managed futures mutual funds have grown to almost $13 billion under management over the past seven years.

That explosive growth has attracted a broad spectrum of clients, including individuals, high-net-worth clients, and smaller institutions, all looking for diversification, and has spurred new firms such as PIMCO and Milliman to jump into the space. Here is what they have to say about the product and its potential.

Ken Mungan: If you think about the typical American and the retirement security challenge that they face, they need to invest for growth and generate a reliable retirement income from their portfolio at the same time. And that is a big challenge for them. It requires combining traditional investing with effective risk management.

Vineer Bhansali: We wanted investors to have access to momentum as a risk factor, and traditional investors until recently haven't had access to this. We wanted to provide it in a liquid form that would be available to retail investors as well as traditional pension-fund-type of investors at a reasonable price.

Ken Mungan: Our goal is to provide simple transparent and reliable risk management services. By going through a managed risk mutual fund, they get the economy of scale that comes with the pooled investment vehicle. It drives the cost down to a very low level, and they also get the benefits of the expertise of a professional risk manager.

Vineer Bhansali: Traditional investors, including most PIMCO portfolios, are more tilted on the value side. They are looking to buy cheap assets, sell expensive assets. There are situations like the 2008 crisis when markets start to trend a lot. This is when strategies such as managed futures are what you want in your portfolio, because they protect you against these large movements in the market.

Ken Mungan: Having futures contracts embedded within managed risk funds brings the risk level down to a point where people are comfortable with the level of risk and can still invest for growth and have the best chance of achieving their goals.

Vineer Bhansali: There's a whole class of funds or assets that traditionally do not fall into the simple category, but they have been available through more sophisticated hedge fund investors. What we are trying to do is fill that gap and say we are going to offer a sequence of these time-tested durable alternative betas that make portfolio composition much more robust.

Ken Mungan: Managed risk mutual funds should really be used by everyone who is either within 10 years of retirement or already in retirement. And if you think about it, that is the Baby Boomers. That is going to be a driving force for exponential growth in the futures industry.

Vineer Bhansali: The Federal Reserve and other central banks around the world are in the process of tapering or removing their support for financial markets, and what that means to me is that markets are going to have to readjust on their own. And readjustment from one equilibrium to another equilibrium always takes place with some sort of trends happening in various markets. So I believe that trend falling over the next two or three years is going to be more profitable than it has been over the last four or five years.

Source: Managed Futures Pinnacle Awards, June 2014. Used with permission of CME Group.